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Economic activity in the euro zone continued to contract in October, a survey of purchasing managers showed, underscoring the possibility of further interest rate cuts by the European Central Bank before the end of the year.
The preliminary reading of the Composite Purchasing Managers' Index for October was 49.7 points, up slightly from 49.6 points the previous month, but still below the critical 50 point mark that separates growth from contraction.
The index's estimates for October, released Thursday, are in line with economists' expectations and suggest the pace of decline in activity is slowing. Despite the PMI rising to 45.9 from 45.0 in September, weak activity in the services sector (the sector index hit an eight-month low of 51.2 in October) was offset by a sharp decline in the manufacturing sector. It got even worse as it fell into negative territory.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which publishes the index along with S&P Global, said: “The eurozone is stuck in a bit of a rut, with the economy contracting slightly for the second month in a row.'' said. He added that the “continued downturn” in manufacturing was partially offset by “some gains in the services sector.”
The ECB this month cut borrowing costs to 3.25% for the second time in a row and for the third time this year, citing falling inflation and growing concerns about the economic recovery. Investors and analysts expect another quarter-point rate cut in December, followed by a series of further cuts in the first half of next year.
Several ECB policymakers have warned that a weaker-than-expected economic recovery puts the economy at risk of falling short of its inflation target over the next 18 months. The ECB is targeting an inflation rate of 2% in the medium term and currently expects to reach that level in the fourth quarter of 2025. Annual inflation fell to 1.7% in September, below the ECB's benchmark for the first time this year. Over 3 years.
Della Rubia stressed that it is unclear “whether we will see further deterioration or improvement in the near future.” New orders and business confidence both declined for the fifth consecutive month.
Eurostat's first estimates of third-quarter GDP, to be published next Wednesday, will provide a clearer picture of the eurozone economy. According to consensus data, analysts on average expect modest growth of 0.2% compared to the previous three months, the same increase as in the second quarter.
“a lot [of data] Commerzbank economist Vincent Starmer wrote in a note to clients following Thursday's PMI data.
Germany's PMI rose to 48.4 from 47.5 in October, suggesting the decline in economic activity in Europe's largest economy has eased.
“October's PMI data shows that German manufacturing is no longer in steep decline,” said Robin Winkler, chief German economist at Deutsche Bank. The German government currently predicts that the country's economy will contract for the second year in a row in 2024, but there is still “no consensus that Germany will go into recession.”
